Corrected:Bill Gross can't stop bleeding from flagship bond fund

NEW YORK Fri Dec 16, 2011 6:05pm EST

PIMCO's Bill Gross participates in Washington, August 17, 2010. REUTERS/Jason Reed

PIMCO's Bill Gross participates in Washington, August 17, 2010.

Credit: Reuters/Jason Reed

NEW YORK (Reuters) - Bill Gross's PIMCO Total Return Fund, the world's largest bond fund, keeps shrinking as investors look to put their money with some of his competitors.

In November, the mutual fund led by Gross saw about $500 million in outflows, bringing its cash outflow over the past 12 months to $10.3 billion, said Morningstar editorial director Kevin McDevitt.

By contrast, November was a banner month for most other taxable bond funds, which took in nearly $10.2 billion in money as a group, according to Morningstar. Over a 12-month period, taxable bonds fund accumulated $105.8 billion in new money.

An outflow of $10.3 billion might not seem too bad for a fund that still oversees $241 billion in assets, but it's an indication that investors are losing some faith in Gross, whose fund has underperformed all year and in November once again missed out on a big move away from stocks and other risky assets and into bonds and Treasury notes.

"The PIMCO Total Return fund has been seeing a steady stream of outflows," McDevitt added. "Gross's fund has underperformed this year and a lot of it goes back to his misplaced bet on Treasuries."

Pacific Investment Management Co., or PIMCO, did not immediately return calls or emails seeking comment.

Based in Newport Beach, California, PIMCO oversees more than $1.35 trillion in assets. It came under heavy criticism earlier this year when Gross bet heavily against U.S. Treasuries, which have turned out to be one of the biggest outperformers of 2011.

Gross, who is known as "the Bond King", apologized to his investors in October for his poor performance, saying "I'm just having a bad year."

In a letter to investors, Gross wrote that he underestimated the contagion effect from the European debt crisis and U.S. deficit concerns. "As Europe's crisis and the U.S. debt ceiling debacle turned developed economies towards a potential recession, the Total Return Fund had too little risk off and too much risk on," said Gross, who also shares the title of co-chief investment officer at PIMCO with Mohamed El-Erian.

The Total Return portfolio is up 3.48 percent so far this year, lagging his peer category which is up an average of 5.87 percent. Put another way, his fund ranks in the 90th percentile, or 163rd out of 181 funds in his category, said Jeff Tjornehoj, head of Lipper Americas Research.

At the same time, the so-called risk-off trade has benefited other taxable-bond funds, which saw nearly $10.2 billion in inflows, of which $8.5 billion was collected in the conservative intermediate-term bond category.

The DoubleLine Total Return Bond, which is run by one of Gross's arch rivals Jeffrey Gundlach, was one of the primary beneficiaries of the risk-off trade in November with nearly $1 billion in inflows.

DoubleLine now manages $21 billion, up from roughly $7 billion at the end of December 2010. Meanwhile, index-driven funds Vanguard Total Bond Market II Index and Vanguard Total Bond Market Index fared even better with nearly $2 billion in combined inflows.

BETTING BIG ON HOUSING DEBT

Gross's latest move is another bold one.

In September, he ramped up buying of mortgage-backed securities, albeit by using leverage, on the likelihood the Federal Reserve's reinvestment program in those securities will boost prices significantly. Analysts says Gross is moving to recalibrate his fund in the expectation the U.S. Federal Reserve will seek to prop up the American housing market by buying mortgage securities.

Last week, PIMCO said mortgage-backed securities now account for about 43 percent of the holdings of the PIMCO Total Return Fund, as of the end of November.

By loading up on mortgage bonds, Gross is making a bet on higher-yielding securities. But in doing so, he is effectively extending the average duration of his fund's investments, making them potentially more exposed to a rise in interest rates.

For now, the performance of housing debt is still trailing Treasuries. Since June 30, the total return of mortgage-backed securities is roughly 3.15 percent -- more than 200 basis points less than U.S. government bonds.

(Reporting by Jennifer Ablan and Matthew Goldstein; Editing by Claudia Parsons and Martin Howell)

(This Thursday story was corrected in paragraph 2 to change the amount of outflows from the PIMCO Total Return Fund over last 12 months to $10.3 billion from $17 billion, according to a revised calculation by Morningstar, which had erroneously calculated the figure and provided it to Reuters in an interview.)

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